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QLAC stands for Qualified Longevity Annuity Contract. A QLAC is a special annuity designed to be purchased with funds from a qualified retirement account such as an IRA. A QLAC annuity will pay a lifetime income starting no later than age 85. QLACs were created for people who are concerned about outliving their retirement assets. A QLAC is not counted as an IRA asset. As a result, the Required Minimum Distribution is reduced after a QLAC purchase (see below). Click Here to Watch Introductory Video
No! The QLAC purchase is not a taxable distribution by the IRAs (see question below on important QLAC limits.) QLAC taxable income arises only when the annuity distribution occurs -- usually much later in the owner's life.
The IRS limits the amount you can put into a QLAC. The limit is the lesser amount: (1) 25 percent of qualified retirement assets, or (2) $135,000. Click Here to Calculate Your Maximum QLAC Purchase For 2020 and after, the maximum QLAC limit increased from $130,000 to $135,000. There is no change in the 25% limitation factor, however; so in 2020, a taxpayer may purchase a QLAC with a premium equal to the lesser of 25 percent of qualified assets or $135,000. The limit does not kick in until January 1, 2020 (based on IRA assets year-end 2017). Therefore, if a taxpayer had contributed $100,000 in 2016 or 2017, they could contribute $35,000 more in 2020.
QLACs were defined and created by the IRS in 2014. While the news about QLACs made a splash in the retirement planning community (Please see our QLAC Links page for examples) the QLAC opportunity remains relatively unknown among the general public. Insurance companies are just now bringing QLAC contracts to market. Also, for those stock brokers, and advisors who earn much of their compensation based on their clients' Funds Under Management, QLACs are predictably unpopular.
Persons in their 60s and 70s should consider a QLAC if they want to assure a permanent source of retirement income for themselves. A QLAC purchase may also provide diversification of a portfolio. Also, individuals often want to reduce the amount of the mandated Required Minimum Distributions (starting after age 72) paid from their qualified retirement funds. By lowering the IRA or other fund balance, the QLAC reduces the required minimum fund distributions and the corresponding tax obligation.
Click Here to See A List of 8 Key Attributes of QLAC Purchasers
The IRS requires that the annuity payments be for the life of the owner of the contract. The tax rules also allow QLAC contracts to pay a Return of Premium (“ROP”) death benefit when the contract owner dies before collecting payments equal to the QLAC premiums paid. The ROP equals the balance of premiums not recovered via annuity payments.
Yes. Without a ROP provision in a QLAC, a death prior to the annuity start date would mean that no annuity benefit whatsoever will be paid. Of course, annuity amounts will be greater without a ROP provision than with a ROP. Generally, most people feel the incremental annuity amount is not worth the risk of losing the ROP death benefit Also, carriers can offer contracts with provisions in between “with and without” a ROP. For example, a policy election might say that a ROP death benefit can only be paid before the QLAC annuity start date.
Click Here to Calculate QLAC Benefits, then follow the links to select a policy without ROP features.
The IRS requires that after age 72 (previously, age 70 and 1/2), an IRA beneficiary makes Required Minimum Distributions (“RMD”) from their IRA. This so-called “RMD” amount is calculated by dividing the account balance of the IRA investment account by a lifetime expectancy factor from an IRS table estimating life expectancy by age.
Click Here to Open RMD Calculator
When a distribution is more than the RMD, there is no penalty. An IRA owner can withdraw the full account balance if he or she wants. But, if the distribution is less than the RMD, the IRS imposes a penalty equal to 50% of the shortfall of the distribution. And an “excess” distribution in a prior year cannot be used to reduce a penalty in the current year. Many people, especially those working in their late 60s and 70s, would prefer to leave their assets in the retirement account to roll up tax-free. That’s where QLAC’s come in. (See above).
Even though the QLAC is acquired with pre-tax dollars, the IRS does not treat the purchase as a taxable event – even though the QLAC asset is excluded from an IRA fund balance. In other words, a Required Minimum Distribution is calculated based on the fund account balance after subtracting the QLAC premium payment. It is important to note that each year’s Required Minimum Distribution is computed using the fund value on December 31st of the past year. Accordingly, a QLAC purchase must precede the prior year-end date in order to reduce a Required Minimum Distribution in the current year. QLACs can be purchased years after or before age 72. The more years between the purchase date and annuity start date, the greater the benefit for each premium dollar.
Click Here to See A Video Explaining QLAC Impact on Investor RMDs
A key difference: the purchase of a deferred annuity (one that is not a qualified QLAC but is purchased with retirement funds) does not take the value of the deferred annuity out of the RMD computation; a QLAC annuity is not counted when computing Required Minimum Distributions. (See above discussion on Required Minimum Distributions.)
Yes. Only a married individual can elect to include his or her spouse in the annuity. The typical QLAC terms will start benefit payments at the annuity start date and one of the couple is still alive. Annuity payments cease upon the second death of the couple. Annuity payments are the same whether one of or both of the couple are living. A ROP is possible after the couple is deceased.
Only a QLAC owner (and spouse) can be living beneficiaries of a QLAC. On the other hand, ROP death benefits can be paid to any person the QLAC owner names in the contract. Also, the IRS rules allow a death benefit of restricted annuity payments to a designated non-spousal beneficiary. The mechanics of these rules are beyond the scope of this Q&A and should be pursued with a qualified advisor.
No. The IRS rules allow an individual with multiple IRAs to aggregate the accounts and apply the 25 percent on the total of all IRAs. Also, the withdrawals to purchase the annuity can come from one or all of the funds. To be clear, there is an aggregate overall limitation of $135,000.
Click Here to See Our Video about Bill and Natalie who confront this issue in their QLAC purchase.
No. The $135,000 limitation is a per taxpayer limit – not a per-account type limitation. Eligible tax-qualified retirement funds are traditional IRAs, 401(k), and 403(b) and 457(b) accounts.
Click Here to Calculate Your Maximum QLAC Purchase
QLAC contribution limits follow the individual and ignore marital status. So, for example, if both members of a married couple have IRA’s under their own name, each with a balance of $540,000, both individuals may purchase their own separate QLACs, each with a maximum balance of $135,000. After the two separate QLAC purchases, the combined QLAC assets of the couple will be $270,000.
Click Here to See A Video Explaining QLAC Impact on a Couple, Both Members of Which Own IRAs
No.
No, a buyer must receive the first annuity payment at or before age 85. A QLAC is a deferred annuity, so there must be at least one year between purchase and the first annuity payment.
Yes, as long as the cumulative premiums satisfy the 25% and $135,000 rules.
No. A Roth IRA is not subject to Required Minimum Distribution rules. Distribution rules kick in at death. As a result, the IRS concluded that QLACs were not necessary for Roth IRAs.
Yes. For the majority of owners, the primary fund will be the IRA. Many carriers are not prepared to receive QLAC premiums from qualified investment accounts other than an IRA. Of course, in some circumstances, plan funds can be transferred to an IRA where a QLAC can be purchased.
IRA owners should consult their financial advisers prior to purchasing a QLAC. Once acquired, QLAC annuities are illiquid and the purchase decision is irrevocable. Due to the lack of liquidity, questionable QLAC candidates are people with uncertain health, with large amounts of debt and/or with IRAs less than $80,000. While QLACs are an excellent retirement tool for many, it may not be the right choice for all. Click Here to See An Infographic - 8 Signs You Need a QLAC
Yes. A QLAC buyer will receive annuity payments until he or she dies. Because there is no “cap” on the QLAC life annuity, the lifetime annuity payments can total well in excess of the premium paid. This is one of the most attractive features of a QLAC investment – helping to assure owners don’t outlive their retirement assets.
Click Here to Open A Calculator Which Will Provide Joint Benefits Calculations for Multiple Insurance Providers
Yes, if the QLAC buyer elects a joint and survivor benefit. The joint and survivor benefit will be smaller than those paid to a single person, but will continue to be paid until both the owner and spouse are deceased.
Most of the QLAC attributes are described above. Here are a few more points. After issuance, the QLAC cannot be traded or sold. The contract has no cash surrender value – thus freeing the carrier from the risk that the contract might be terminated at any point in time. The benefits of the contracts are general obligations of the carriers. Separate accounts and variable type investments are not allowed in a QLAC. However, many of the QLAC contracts do offer fixed percentage inflation growth of benefits.
No, death benefits from a QLAC contract are taxable income to the beneficiary. They do not raise to level of tax exempt life insurance proceeds nor are they eligible for any special rollover treatment.
Want to learn more? Check out our videos page to see additional QLACguru videos. See our calculators to develop an anonymous RMD calculation and estimated QLAC quote. Answer specific questions by going to our Knowledgebase page. Visit our blogs page for in-depth articles on a variety of topics including how QLACs help with Sequence Risk, how QLACs are similar to and different from Social Security, best practices in buying a QLAC as well as many other topics.
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